The Markets May 10, 2016

Return Spreads Widen as 2016 Markets Remain Tough

Stronger bond returns could not match weaker U.S. and falling developed market equity returns, according to the Wilshire Trust Universe Comparison Service, dragging down institutional investor performance. 
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Institutional assets tracked by the Wilshire Trust Universe Comparison Service (Wilshire TUCS) saw a median return of 1.13% for the first quarter, which led to a median trailing annual loss of -1.17%.

Wilshire TUCS is a cooperative effort between Wilshire Analytics, the investment technology unit of Wilshire Associates Incorporated, and a group of custodial organizations serving a wide variety of U.S. institutional investors.

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Looking at data collected by the firms over the first five months of 2016, Wilshire TUCS shows the main exception to poor performance for first quarter was the U.S. real estate asset class, “due to a strong March, with the Wilshire US RESISM gaining 10.43% for March and 5.30% for the quarter.” Other assets classes used much more commonly in retirement plans and by other institutional investors lagged far behind. The Wilshire 5000 Total Market Index, for example, was up only 1.17% for the quarter, versus the MSCI EAFA or international developed market equity’s -3.01% loss for the quarter.

Robert Waid, managing director, Wilshire Associates, observes that bonds were stronger in the quarter, as the Barclays U.S. Aggregate gained 3.03%. This translates to a small range of plan returns with a low of 0% for large foundations and endowments with assets greater than $500 million and a high of 2.32% for large corporate funds with assets greater than $1 billion for the quarter.

“The spread for one-year returns was also small with a low of -2.20% for foundations and endowments and a high of 0.11% for Taft-Hartley health and welfare funds,” Waid adds. “Though all plan-type categories had positive median returns, a median return of 1.13% for all plans this quarter lags any annualized target and kept all plan-type categories negative for the year except Taft-Hartley Health and welfare funds.”

NEXT: Other highlights from the data 

According to Wilshire, this was the third quarter in a row where the 60/40 portfolio beat the median plan return, with a return of 1.91%. “Only large Corporate Plans beat the 60/40 portfolio in the first quarter,” Waid notes.

The backward-looking data from Wilshire also shows the differences in investment philosophies among different types of instructional investors. Corporate defined contribution plans, for example, tend to stick pretty close to the traditional 60/40 portfolio of bonds and equities, with the U.S. to international equity ratio standing at about 3:1.

Public plans, on the other hand, tend to carry about 10% more equity than their corporate counterparts, with more of the equity allocation going to U.S.-domiciled investments. Other differences emerged when filtering the data into groups of large and small plans, with larger plans of all types being likelier than their smaller counterparts to be using significant allocations to alternatives.

 Additional information and research is at www.wilshire.com. 

Data & Research May 10, 2016

Data Supports Need to Save More for Retirement Health Costs

Employer-sponsored retiree health benefits are disappearing, an analysis finds.
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Traditionally, employer- and union-sponsored retiree health benefits have served as an important source of supplemental coverage for people on Medicare. But, those days are gone.

The Kaiser Family Foundation has been tracking trends in employer-sponsored health coverage, and has documented a significant drop in the share of large employers (200 or more workers) offering retiree health coverage, from 66% in 1988 to 23% in 2015. Firms that continue to offer retiree health benefits have adopted various strategies to limit their liability for these costs, including: hard caps on their financial liability, a shift from a defined benefit to a defined contribution approach, and increases in premiums and cost-sharing requirements paid by retirees and  their spouses. In recent years, some employers have elected to offer retiree benefits through contracts with Medicare Advantage plans and private health insurance exchanges.

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The Foundation found five national surveys show a shrinking share of seniors on Medicare with supplemental retiree health coverage. For example, in the survey providing the highest estimates of retiree coverage among people ages 65 and older on Medicare—the American Community Survey—the share declined from 31% in 2008 to 25% in 2014. In the National Health Interview Survey, the share declined from 24% in 2005 to 16% in 2014.

The drop in retiree health coverage has important implications for those nearing retirement and younger generations. Fidelity’s Retirement Health Care Cost Estimate study now projects a healthy couple retiring this year at age 65 should expect to spend $245,000 on health care throughout retirement, up from $220,000 last year. The figure has increased 29% since 2005, Fidelity says, when the projection was $190,000.

For those near retirement, the decline in employer-sponsored retiree health coverage could lead to an increase in the demand for individually purchased Medicare supplemental (Medigap) insurance policies and contribute to the rise in Medicare Advantage enrollment, particularly among those who are willing to trade more limited provider networks for the financial protection that comes with a limit on out-of-pocket spending, the Foundation says.

For younger generations, it signals a need to save more for retirement.

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